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Guide to Obligations of Proprietary Limited Companies

Summary of Obligations under the Corporations Act 2001 (Cth) for Australian Proprietary Limited Companies

Pym's Technology Lawyers has set out a summary of the main rules and obligations under the Corporations Act 2001 (Cth) that apply to Australian proprietary companies limited by shares.

1. WHAT REGISTRATION MEANS

1.1 Separate legal entity that has its own powers

As far as the law is concerned, a company has a separate legal existence that is distinct from that of its owners, managers, operators, employees and agents. A company has its own property, its own rights and its own obligations. A company’s money and other assets belong to the company and must be used for the company’s purposes.

A company has the powers of an individual including the powers to:

own and dispose of property and other assets;
enter into contracts; and
sue and be sued.

Once a company is registered, its separate legal status, property, rights and liabilities continue until the Australian Securities and Investment Commission (ASIC) deregisters the company.

1.2 Limited liability of shareholders

Shareholders of a company are not liable (in their capacity as shareholders) for the company’s debts. As shareholders, their only obligation is to pay the company any amount unpaid on their shares if they are called upon to do so. However, if a shareholder is also a director, this limitation may be affected by other laws and the commercial practices discussed in 1.3 and 1.4.

1.3 Director’s liabilities for company’s debts

A director of a company may be liable for debts incurred by the company if the company is trading whilst it is insolvent.

A director of a company may be liable to compensate the company for any losses the company suffers from a breach of certain director’s duties to the company (see 3.3).

In addition to having liability for the company’s debts or to pay compensation to the company, a director may also be subject to a civil penalty.

If a company holds property on trust, a director of the company may be liable in some circumstances for liabilities incurred by the company as trustee.

1.4 Director’s liability as guarantor/security over personal assets

As a matter of commercial practice, a bank, trade creditor or anyone else providing finance or credit to a company may ask a director of the company:

for a personal guarantee of the company’s liabilities; and/or
for some form of security over their personal assets to secure the performance by the company of its obligations.

The director of a company may, for example, be asked by a bank to give a mortgage over their house to secure the company’s repayments of a loan. If the company does not repay the loan as agreed with the bank, the director may lose the house.

1.5 Continuous existence

A company continues to exist even if 1 or more of its shareholders sells their shares, dies or leaves the company. If a company has only one shareholder who is also the only director of the company and that person dies, his or her personal representative is able to ensure that the company continues to operate.

1.6 Rules for internal management of a company

The Corporations Act 2001 (Cth) contains a basic set of rules for the internal management of a company (appointment of directors, meetings etc).

Some of these rules are mandatory for all companies. There are a few special rules for single shareholder/single director companies.

It is possible, and usual, for a company to adopt a set of rules governing its internal procedures and these may be different to the rules that are set out in the Corporations Act. These rules are set out in a Constitution.

1.7 How a Company acts

A company does not have a physical existence and therefore must act through its directors, secretary, employees and agents.

Individual directors and/or employees may be authorised to enter into contracts that bind the company.

In some circumstances, a company will be bound by something done by another person.

1.8 Directors

The directors of a company are responsible for managing the company’s business. It is a rule generally that directors may exercise all the powers of the company, except where a provision of the company’s constitution, a shareholders' agreement or the law requires the company to exercise the power in a general meeting.

The Corporations Act 2001 (Cth) sets out rules dealing with the calling and conduct of directors’ meetings. Directors must keep a written record (minutes) of their resolutions and meetings.

There are 2 ways that directors can pass resolutions:

at a meeting; or
by having all the directors entitled to vote record and sign their decision.

For further discussion on directors' resolutions and templates see Making Decisions.

1.9 Shareholders

The shareholders of a company own the company, but the company has a separate legal existence and the company’s assets belong to the company.

Shareholders can make decisions about the company by passing a resolution, usually at a meeting. A “special resolution” usually involves more important questions affecting the company as a whole or the rights of some or all of its shareholders.

There are 2 ways that shareholders can pass a resolution:

at a meeting; or
by having all the shareholders entitled to vote record and sign their decision.

If a meeting is held, an ordinary resolution must be passed by a majority of the votes cast by shareholders of the company entitled to vote on the resolution at the meeting in person or by proxy (if proxies are allowed). A special resolution must be passed by at least 75% of the votes cast by shareholders of the company entitled to vote on the resolution and who vote at the meeting in person or by proxy (if proxies are allowed).

A company must keep a written record (minutes) of the members’ resolutions and meetings.

For further discussion on shareholders' resolutions and templates see Making Decisions.

1.10 What others can assume about the company

Anyone who does business with the company is entitled to assume that the company has a legal right to conduct that business unless the person knows, or suspects otherwise. For example, an outsider dealing with the company is entitled to assume that:

a person who is shown in a notice lodged with ASIC as being a director or company secretary of the company has been properly appointed and is authorised to act for the company; and
the person who is held out by the company to be a director, company secretary or agent of the company has been property appointed and is authorised to act for the company.

1.11 ACN and ABN

When a company is registered, ASIC allocates to it a unique 9 digit number called the Australian Company Number (ACN) and the Australian Taxation Office will allocate an Australian Business Number (ABN). (For use of the company name and ACN see 2.1)

Registered office

A company must have a registered office in Australia and must inform ASIC of the location of the office. A post office box cannot be the registered office of a company. The purpose of the registered office is to have a place where all communications and notices to the company can be sent.

If the company does not occupy the premises where its registered office is located, the occupier of the premises must agree in writing to having the company’s registered office located there.

A proprietary company is not required to open its registered office to the public but this does not affect its obligation to make documents available for inspection.

The company must notify ASIC of any change of address of its registered office.

Pym’s Technology Lawyers is able to act as a company’s registered office if required.

1.12 Principal place of business

If a company has a principal place of business that is different to its registered office, it must notify ASIC of the address of its principal place of business and of any changes to that address.

1.13 Registers kept by the company

A company must keep registers, including a register of shareholders and a register of charges. A company must keep its registers at:

the company’s registered office; or
the company’s principal place of business; or
a place (whether on premises of the company or of someone else) where the work in maintaining the register is done; or
another place approved by ASIC

A register may be kept either in a bound or loose leaf book or on a computer provided that it can be reproduced in written form.

1.14 Register of shareholders

A company must keep in its register of shareholders such information as:

the names and addresses of its shareholders;
details of shares held by individual shareholders; and
the date on which the entry is made.

1.15 Register of charges

A company must keep a register of charges if the company gives a bank, trade creditors or anybody else a charge over any of the company assets.

Note: Other registers may be required to be kept.

2. CONTINUING OBLIGATIONS AFTER THE COMPANY IS SET UP

The Corporations Act and other laws impose obligations on companies themselves and on their directors and company secretaries. Some of the more important obligations imposed under the Corporations Act are discussed below.

2.1 Use of the company name and ACN

The name of the company must be shown at all the company’s business premises (including its registered office) that are open to the public. The company’s name and its ACN must appear:

on its public documents;
on its cheques and negotiable instruments;
on all documents lodged with ASIC; and
if it has one, on its common seal.

2.2 Notification to ASIC of changes

The company must notify ASIC if certain basic changes to the company occur such as:

the company issues shares;
the company changes the location of a register;
the company changes the address of its registered office or principal place of business;
the company changes its directors or company secretary;
there is a change in the name or address of a director or secretary;
the company creates certain kinds of charges.

2.3 Annual statement

A company will receive within 14 days of its annual review date (generally the anniversary of its registration) an annual statement which sets out the information current on ASIC's database including:

the names and addresses of each director and company secretary;
issued shares and options granted;
details of its shareholders;
address of its registered office;
address of its principal place of business;
ultimate holding company.

If any of the information in the annual review statement is incorrect, ASIC must be notified within 28 days of the annual statement issue date.

2.4 Annual review fee

A company must pay an annual review fee to ASIC. This fee is due within 2 months of the company's annual review date.

2.5 Solvency Declaration

Generally, the Directors must pass a solvency declaration within 2 months of each annual review date.

3. COMPANY DIRECTORS AND COMPANY SECRETARIES

3.1 Who can be a director

A director must be an individual who is 18 years or older. If a company has only 1 director, they must ordinarily reside in Australia. If a company has more than 1 director, at least 1 of the directors must ordinarily reside in Australia.

A director must consent in writing to holding the position of director. The company must keep the consent and must notify ASIC of the appointment.

In some circumstances, the Corporations Act imposes the duties and obligations of a director on a person who, although not formally appointed as a director of the company, nevertheless acts as a director or gives instructions to the formally appointed directors as to how they should act.

An Australian court or ASIC may prohibit a person from being a director or from otherwise being involved in the management of a company, if, for example, the person has breached the Corporations Act. A person needs the court’s permission to be a director if the person has been convicted of certain offences or is, in some circumstances, unable to pay their debts as and when they fall due.

Generally, a director may resign by giving notice of the resignation to the company. The company must notify ASIC of the director’s resignation. A director who resigns may also notify ASIC of the resignation.

3.2 Appointment of new directors

Generally, shareholders appoint directors by resolution at a general meeting, although a Shareholders' Deed may allow for the appointment of Directors in some other way, e.g. by particular shareholders.

3.3 Duties and liabilities of directors

In managing the business of the company, each of its directors is subject to a wide range of duties under the Corporations Act and other laws. Some of the more important duties are:

to act in good faith;
to act in the best interests of the company;
to avoid conflicts between the interests of the company and the director’s interests;
to act honestly;
to exercise care and diligence;
if the company is in administration – to report to the liquidator on the affairs of the company; and
if the company is being wound up – to help the liquidator (by, for example, giving to the liquidator any records of the company that the director has).

A director who fails to perform his or her duties:

may be disqualified from managing a company;
may be guilty of a criminal offence with a penalty of $200,000 or imprisonment for up to 5 years or both;
may contravene a civil penalty provision (and an Australian Court may order the person to pay to the company compensation equal to the amount of that loss or damage); and
may be personally liable to compensate the company or others for any loss or damage they suffer.

3.4 Company Secretaries

A company may have a company secretary. The directors appoint the company secretary. A company secretary must be 18 years or older. The same person may be both a director of the company and the company secretary. If a company has only one director who is also the company secretary, they must ordinarily reside in Australia.

A company secretary must consent in writing to holding the position of company secretary. The company must keep the consent and must notify ASIC of the appointment.

Generally, a company secretary may resign by giving written notice of the resignation to the company. The company must notify ASIC of the company secretary’s resignation. A company secretary who resigns may also notify ASIC of the resignation.

The company secretary is an officer of the company and, in that capacity, may be subject to certain requirements imposed by the Corporations Act on company officers.

Pym’s Technology Lawyers offers company secretarial services to support company secretaries, including preparation of notices, attending meetings, acting as custodian of registers etc.

4. SHARES AND SHAREHOLDERS

A proprietary company limited by shares must have a share capital and at least 1 shareholder. ASIC may apply to an Australian court to have a company wound up if it does not have any shareholders.

4.1 Becoming a shareholder and ceasing to be a shareholder

A person may become a shareholder of a company is several ways, including the following:

the person being listed as a shareholder of the company in the application for registration of the company;
the company issuing shares to the person;
the person buying shares in the company from existing shareholders and the company registering the transfer.

Some of the ways in which a person ceases to be a shareholder are:

the person sells all of his or her shares in the company and the company registers the transfer of the shares;
the company buys back all the person’s shares;
ASIC cancels the company’s registration.

Where there is more than one shareholder it is common to have a Shareholders' Deed which sets out the rights and obligations of shareholders.

4.2 Classes of shares

A company may have different classes of shares. The rights and restrictions attached to the shares in a class distinguish it from other classes of shares.

4.3 Meeting of shareholders

Directors have the power to call meetings of all shareholders or meetings of only those shareholders who hold a particular class of shares.

Shareholders who hold at least 5% of the votes which may be cast at a general meeting of a company have the power to call a meeting themselves or to require the directors to call a meeting. Meetings may be held regularly or to resolve specific questions about the management or business of the company.

The Corporations Act, the company's Constitution and/or a Shareholders' Deed set out rules dealing with shareholders' meetings.

A shareholder of a company may ask the company for a copy of the records of a meeting or of a decision of shareholders taken without a meeting.

4.4 Voting rights

Different rights to vote at meetings of shareholders may attach to different classes of shares. Subject to any rights set out in the Constitution or a Shareholders' Deed, each shareholder has one vote on a show of hands and on a poll, one vote for each share held.

4.5 Buying and selling shares

A shareholder may sell its shares but only if the sale would not breach the company’s Constitution or the Shareholders' Deed.

5. SIGNING COMPANY DOCUMENTS

A company’s power to sign, discharge and otherwise deal with contracts can be exercised by an individual acting with the company’s authority and on its behalf. A company can execute contracts without using a common seal.

A company may execute a document by having it signed by:

2 directors of the company; or
a director and the company secretary; or
for a company with a sole director who is also the sole secretary – that director; or
by delegating authority to a person to sign the document; or
by signing a document under a Power of Attorney.

If the document is to have the effect as a deed, it should be expressed to be a deed.

A company is not required to have a common seal. If it does, the seal must show the company’s name and ACN. The seal is equivalent to the company’s signature and may be used on important company documents such as loans. Generally, a seal should be affixed in the manner set out above unless a different procedure is provided for in the Constitution.

6. FUNDING THE COMPANY’S OPERATIONS

The Shareholders may fund the company’s operations by lending money to the company or by taking up other shares in the company. With limited exceptions, a proprietary company must not engage in any fundraising activity that would require the company to lodge a prospectus with ASIC (for example, advertising in a newspaper inviting people to invest in a company)

The company may also borrow money from banks and other financial institutions.

Anyone who has lent money, or provided credit to the company may ask for a mortgage or charge over the company’s assets to secure the performance by the company of its obligations.

7. RETURNS TO SHAREHOLDERS

Shareholders can take money out of the company in a number of ways but only if the company complies with its Constitution, the Corporations Act and all other relevant laws. If a company pays out money in a way that results in the company being unable to pay its debts as they fall due, its directors may be liable:

to pay compensation; and
for criminal and civil penalties.

Dividends are payments to shareholders out of the company’s after tax profits.

8. ANNUAL FINANCIAL REPORTS

8.1 The small/large distinction

The accounting requirements imposed on a proprietary company under the Corporations Act depend on whether the company is classified as small or large. A company’s classification can change from one financial year to another as its circumstances change.

A company is classified as small for a financial year if it satisfies at least 2 of the following tests:

consolidated revenue of less than $25 million for the year;
consolidated gross assets of less than $12.5 million at the end of the year;
fewer than 50 employees at the end of the year.

A company that does not satisfy at least 2 of these tests is classified as large.

As a great majority of proprietary companies are small under these tests, the discussion below deals mainly with the accounting requirements for small proprietary companies.

8.2 Financial records

Under the Corporations Act, all proprietary companies must keep sufficient financial records to record and explain their transactions, financial position and performance and to allow true and fair financial statements to be prepared. Financial records mean some kind of systematic record of the company’s financial transactions – not merely a collection of receipts, invoices, bank statements and cheque butts. Financial records must be retained for 7 years. If they are kept in electronic form, they must be convertible to hard copy.

8.3 Preparing annual financial reports and directors' reports

The Corporations Act requires a small proprietary company to prepare an annual financial report (an annual profit and loss statement, a balance sheet and a statement of cash flows) and a directors' report (about the company’s operations, dividends paid or recommended and options issued etc) if:

the shareholders with at least 5% of the votes in the company direct it to do so; or
ASIC directs it to do so.

Unless the shareholders' direction specifies otherwise, the company must prepare the annual financial report in accordance with the applicable accounting standards.

Although the Corporations Act itself may not require a small proprietary company to prepare an annual financial report except in the circumstances mentioned, the company may need to prepare the annual financial reports for the purposes of other laws (for example, income tax laws). Moreover, good business practise may also make it advisable for the company to prepare the financial reports so that it can monitor and better manage its financial position.

A large proprietary company must prepare a financial report and directors' report for each financial year.

Next, learn about making decisions and documenting resolutions of Directors and Shareholders of proprietary limited companies in Australia.

Business Structures Company Formation and Administration Government Procurement Foreign Investment Guidelines Intellectual Property Guide to Obligations of Proprietary Limited Companies Making Decisions—Resolutions for Proprietary Limited Companies

Company Constitution

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